Among the impacts of corn ethanol production, one consolation for U.S. livestock producers has been the availability of co-products such as dried distillers’ grains with solubles (DDGS) for use as feed. But global demand for DDGS is growing, and a new report from USDA’s Economic Research Service explores the potential for expanded exports to China, which could drive domestic DDGS prices higher.

About 31 percent of every bushel of corn used for dry-mill ethanol production comes back as DDGS. According to the USDA, during the 2010-2011 corn marketing year, U.S. dry-mill ethanol producers used 116.2 million metric tons (MMT) of corn to produce 12.4 billion gallons of fuel ethanol, resulting in the production of 36.3 million metric tons of DDGS,

The report’s authors note growing international interest in DDGS, saying about 19 to 25 percent of U.S. production currently supplies export markets. DDGS exports grew from about 2 million metric tons in the 2006-2007 marketing year to over 8 MMT in 1020-2011. China has been one of the fastest-growing markets, and imported 2.2 million metric tons of U.S. DDGS in 2009-2010. The total dropped to 1.6 MMT in 2010-2011, in part due to higher DDGS prices.

Surprisingly, DDGS imported from the United States remain cost-competitive relative to other feeds in China.  From June through December 2011, the average price of imported DDGS in China was about $310 per metric ton, 19 percent lower than the cost of domestic Chinese corn and 35 percent lower than soybean meal

DDGS imports also receive favorable tax treatment in China, avoiding a 13 percent value added tax (VAT) on imported corn and soybean meal.

Although China is becoming a major power in livestock production the makeup of its primary livestock species could limit growth of DDGS use for feed. The authors note that in the United States, DDGS are used mostly for feeding cattle, as the product’s fiber content limits its use in non-ruminant animals.

Poultry and swine make up the bulk of livestock production in China. According to the report, poultry accounted for nearly half of the feed manufactured in China in 2010, while swine accounted for 37 percent, aquaculture 9 percent and cattle just 4 percent. The authors note, though, that while the optimum percentage of DDGS used in feeds for non-ruminants is smaller than that for cattle, the sheer numbers of poultry and swine in China could create substantial demand. USDA’s baseline projections to 2021 project that China’s feed and residual use of corn will expand from 124 MMT to 172 MMT and soybean meal consumption will rise from 43 MMT to 73 MMT.

The report notes that China’s imports of U.S. DDGS are sensitive to prices relative to those for imported and domestically produced corn and soybeans. DDGS prices in the United States are closely correlated with corn prices, and with this year’s short crop driving corn prices into the $8 per bushel range, corn and DDGS exports are likely to decline in the short term. The authors also note that the growth rate of U.S. ethanol production is likely to slow from that seen over the past few years, and domestic demand for DDGS is likely to keep pace with supplies.

Exports will continue to be a factor in the price and availability of DDGS in the United States, and the trend will bear watching in the future.

Read the report from USDA/ERS.